US recovery is joker in pack for RBA policy

The much stronger-than-expected US economic recovery (relative to the priors 12-24 months ago), which, critically, means that both the world's number 1 and number 2 economies are now expanding at or above historical trend, with the former likely to accelerate further, is a real curve-ball for Australian monetary policy. The RBA was relying on weak US growth over the next couple of years as the deleveraging process gripped. Instead, the US has rejected the European austerity approach and decided to try and boot-strap its way out of its quagmire via policy-induced growth. The Chinese authorities are similarly hell-bent on avoiding anything resembling a subdued expansion for fear of the social instabilities that this might stimulate (read: The Party's plutocracy is not the best available economic model). This means that in the medium term the global economy will likely grow significantly faster than the RBA had expected. Combined with the spectre of unanticipated inflation problems in all of Australia's major trading partners (bar Japan), which, with the guts of the currency appreciation behind us, Australia risks importing, the RBA is going to have a major monetary policy challenge on its hands. The RBA's task is made all the more awkward care of the floods-imposed inflation spike, which has already had an immediate impact on domestic inflation expectations (the latter of which had persistently drifted upwards in the years before the GFC). Together with a labour market that is already fully-employed prior to the start of the biggest private investment boom in history (much of which has already commenced), it is hard to see how the RBA is not going to surprise the financial markets with a spate of earlier-than-projected hikes. Rest assured here that the US economic rebound is the joker in the pack that the RBA had not banked on.